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Inside Look: RealTrends 2021 Brokerage Compensation Study

Steve Murray, senior advisor to RealTrends, gives an exclusive first look at the 2021 RealTrends Brokerage Compensation Report.

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M&T Bank latest to settle FHA-lending violations, will pay $64 million

Another lender accused of violating False Claims Act

Joining a list that now includes Wells FargoFranklin American MortgageWalter Investment, First Tennessee Bank and Freedom Mortgage, among others, M&T Bank agreed to settle with the Department of Justice over alleged violations of the False Claims Act.

The Department of Justice announced Friday that M&T Bank will pay $64 million for originating loans that did not meet Federal Housing Administration underwriting standards.

M&T Bank becomes the latest lender to settle with the government, which has used the False Claims Act on several occasions to extract settlements out of mortgage companies.

The False Claims act is the primary law the government uses to prosecute vendors it feels fraudulently represented themselves while doing business with the nation.

In recent months, Wells Fargo agreed to a $1.2 billion settlement, while Franklin American settled with the government for $70 million, Walter Investment settled for $29.6 million, First Tennessee, the regional bank for First Horizon National, settled for $212.5 million, and Freedom Mortgage agreed to pay $113 million – all for False Claim Act violations.

M&T Bank is now the next name on the government’s False Claims Act hit list.

According to the DOJ, M&T Bank violated the False Claims Act by “knowingly” originating and underwriting mortgage loans that did not meeting FHA and Department of Housing and Urban Development underwriting guidelines.

As with several of the other companies, M&T Bank acted as a “direct endorsement lender” in the FHA insurance program, which grants the lender the authority to originate, underwrite and endorse mortgages for FHA insurance without prior approval from the FHA.

Under the direct endorsement lender program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.

According to the DOJ, M&T Bank “failed to comply” with certain FHA origination, underwriting and quality control requirements.

“Mortgage lenders that fail to follow FHA program rules put taxpayer funds at risk and increase the chances of borrowers losing their homes,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division. “We will continue to hold lenders accountable for knowingly submitting ineligible loans for FHA insurance.”

The DOJ said that as part of the settlement, M&T Bank admitted that between Jan. 1, 2006, and Dec. 31, 2011, it certified mortgage loans that did not meet HUD underwriting requirements and did not adhere to FHA’s quality control requirements.

M&T Bank also allegedly failed to review all Early Payment Default loans, which are loans that become 60 days past due within the first six months of repayment. 

Between 2006 and 2011, M&T also failed to review an adequate sample of FHA loans, as required by HUD, the DOJ said.

Additionally, the DOJ said that M&T created a quality control process that misrepresented the “major error” rate on the loans it originated.

The DOJ said that M&T Bank also failed to follow HUD’s self-reporting rules. 

“While M&T Bank identified numerous FHA insured loans with ‘major errors’ between 2006 and 2011, M&T Bank did not report a single loan to HUD until 2008, and thereafter self-reported only seven loans to HUD,” the DOJ said.

“As a result of M&T’s conduct and omissions, HUD insured hundreds of loans approved by M&T that were not eligible for FHA mortgage insurance under the Direct Endorsement program and that HUD would not otherwise have insured,” the DOJ continued. “HUD subsequently incurred substantial losses when it paid insurance claims on those loans.”

The DOJ said that the settlement resolves allegations first brought to light in a whistleblower lawsuit filed under the False Claims Act by a former employee of M&T Bank, Keisha Kelschenbach.

Under the False Claims Act, private citizens can sue on behalf of the government and share in any recovery. The share to be awarded in this case has not yet been determined, the DOJ said.

“This recovery on behalf of the Federal Housing Administration should serve as a reminder of the potential consequences of not following HUD program rules and the value of private citizen assistance, including whistleblowers, in pursuing lenders that violate the rules,” said Inspector General David Montoya of the Department of Housing and Urban Development.

In a statement, M&T Bank said that it did not admit liability in the settlement and chose to settle to avoid the cost of taking the case to court, as Quicken Loans elected to do.

“We made a business decision to settle this matter, without admitting liability, in order to avoid the expense of potential litigation,” M&T Bank said in a statement.

“As we have also previously disclosed, this settlement will not have a material impact on our financial condition or results of operations,” M&T Bank continued. 

“We are the 16th mortgage lender to settle such claims, which relate to matters that went back as far as ten years,” M&T concluded. “Looking forward, we will continue as a leading and responsible provider of home loans in the communities we serve, including as a FHA program participant.”

(Update: This article is now updated to clarify the "direct endorsement lender" program.)

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